Sunday, April 22, 2007

I was reading a March Wall Street Journal article this morning (I just can't throw them away till I read them) and came across an article on the subprime lender mess (see my earlier NFI post). It's actually interesting to pick up a one or two month old paper and read its contents with today's perspective.

Here we are knocking on the door of 13,000, and this article spoke of the troubles the market was having back then. "We're in a kind of panic mode," said one economist from RBS Greenwich Capital. It goes back to one of my favorite quotes of Warren Buffett: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." I love when the market overreacts, whether in general or to a specific stock I own, because it always presents a buying opportunity. Sometimes the panic even seems irrational - as far as I can tell, we still have a mess on our hands with the subprime lenders. This problem has not been fixed, and yet the market was really uptight about it a month or more ago, but has simply shrugged it off in April.

The worst recent example of this overreaction, in my opinion, was the recent British sailor hostage crisis with Iran. The market had a bit of trouble digesting this news. Of course we were all on edge over their capture, as we all wondered if they had actually done anything wrong. I had a tough time figuring out what this had to do with stock prices. Then, the headline in Businessweek read, "Stocks Jump as Oil Dips - Crude oil prices dropped on hopes the Iran hostage crisis will be resolved diplomatically." And then of course it was resolved, and the market reacted positively. Iran was still the same country after they released those hostages (a threat, a nuclear threat, a friend, whatever your opinion is) - nothing really had changed about Iran! Further, nothing had changed regarding the fundamentals of any publicly traded company, except maybe oil companies.

You can profit from these erratic market fluctuations. The tempation for so many Americans is to stay out of the market when there's signs of trouble, but to pour money in when things are on the rise. Do the opposite, to the best of your ability, and you'll do very well for yourself. Take a long-term view, and you'll not only be able to stomach market turbulence, but profit greatly from it.